Vornado grabs a slice of $6.6b toy chain buyout

Real Estate Weekly, March 23, 2005 by Elaine Misonzhnik

Vornado Realty Trust is on a shopping spree. Only months after the company purchased a 4.3% stake in Sears, Roebuck & Co., it has agreed to buy Toys'R'Us in a joint venture with Kohlberg Kravis Roberts and Bain Capital Partners for $6.6 billion.

This purchase, like the Sears deal before it, will give Vornado a fair amount of control over Toys'R'Us' real estate assets, which include a significant number of long-term leases in suburban malls and urban retail centers around the country. Toys'R'Us has closed down a number of its locations lately, because of competition from such discount retailers as Wal-Mart and K-Mart.

"Toys'R'Us has a great value in its real estate and there is no doubt that it has played a role [in Vornado's decision]," said Peter Botsaris, president of Garrick-Aug. "They usually take big spaces, in very strong, easily identifiable retail districts. Toys'R'Us has some of the best locations in the New York tri-state area--you can set up auctions for that type of real estate."

According to Richard Hodos, president of Madison HGCD, "A lot of the Toys'R'Us properties may be parcels that are wholly-owned, or they might be long-term ground leases with a high inherent real estate value. And Vornado can look at things in a way that other real estate players do not, they just think outside the box."

Though there are no plans at the present to completely overhaul the Toys'R'Us business strategy, Hodos noted that the toy industry as a whole has not been doing well lately.

"Toys, as a category, are doing much worse this year than last," he said. "A lot of people are buying toys online and Wal-Mart has taken such a chunk of the toy business directly from Toys'R'Us that it's part of the reason this is happening."

Currently, Toys'R'Us maintains approximately 1,500 stores around the world, most of them averaging from 50,000 s/f to 100,000 s/f of space. In the United States, the toy retailer owns 314 locations, ground leases 152 and leases 219. Vornado has paid $450 million for its stake in the company.